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Fraudulent Transfers in Illinois

Q.        What is Illinois’ Uniform Fraudulent Transfer Act (“IUFTA”)?

The IUFTA is a statute designed to combat fraudulent transfers by debtors that impair the rights of creditors.  It can be found at 740 ILCS 160/1 et. seq.  Illinois is one of more than 40 American jurisdictions with a version of this statute.

Q.        What is a fraudulent transfer?

A “fraudulent transfer” refers to a debtor’s dissipation of assets to thwart a creditor’s ability to collect on a debt.  It typically occurs when a debtor gives away valuable assets in exchange for little or nothing in return.

Q.        What is not a fraudulent transfer?

If the debtor received fair value for an asset, the transfer is probably not fraudulent.  A sale of property for a fair price is not a fraudulent because it does not deplete the debtor’s net worth; the debtor has merely exchanged one form of value for another (usually cash). Likewise, the repayment of a legitimate debt does not deplete the debtor’s net worth; using an asset to pay a liability has no effect on the debtor’s net worth.

Q.        Are there different kinds of fraudulent transfers?

Yes.  The IUFTA recognizes three different types.  A transfer is “fraudulent-in-fact” if the debtor actually intended to hinder, delay, or defraud any creditor.  A transfer is “fraudulent-in-law” if it has the effect of hindering, delaying, or defrauding any creditor, irrespective of whether the debtor actually intended to do so.  Preferential transfers to insiders may also be fraudulent.

Q.        What is “reasonably equivalent value” under the IUFTA?

Section 4 of the IUFTA does not define “reasonably equivalent value” for a transfer very clearly, although §4(a) defines “value” as only (1) a transfer of property or (2) the satisfaction or security of an antecedent debt.  Surprisingly, we also found very little Illinois case law defining “reasonably equivalent value.”  However, a comment to §3 of the Model Uniform Fraudulent Transfer Act, from which IUFTA §4 derives suggests that “value” should be interpreted to protect a debtor’s estate from being depleted to the prejudice of the debtor’s unsecured creditors.

At Schwartz & Kanyock, we regularly litigate these, and other issues relating to the IUFTA.  These issues can be quite complex, and cannot be explained in a short blog.  If you find yourself in need of a better explanation, please call us today.

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